BAB020 12/98
D O N O T C
Levi’s “Personal Pair™” Jeans (A)
In 1995, women’s jeans was a $2 billion fashion category in the US and growing fast. Levi-Strauss was the market leader, but its traditional dominant position was under heavy attack. Standard Levi’s women’s jeans, sold in 51 size combinations (waist and inseam), had been the industry leading leading product for decades, but “fashion” was now taking over the category. category. Market research showed that only 24 percent of women were “fully satisfied” with their purchase of standard jeans at about $50 per pair.
“Fashion” in jeans meant more styles, styles, more colors, and better fit. All of these combined to create a level of product line complexity that was a nightmare for manufacturing-oriented, “push-based” companies like Strauss. By 1995, Strauss operated 19 Original Levi’s Levi’s retail stores across the country (2,000 to 3,000 square foot mall stores) to put them in closer touch with the ultimate customers. But this channel was a very small small part of their overall $6 Billion sales which were still primarily to distributors and/or independent retailers. Exhibit 1 shows Levi’s financial footprint. Strauss was as aggressive as most apparel manufacturers and retailers in investing in process improvements and information technology to improve manufacturing and delivery cycle
Levis “Personal Pair™ “ Jeans (A).
BAB020
possible by a partnership with Custom Clothing Technology Corp. (CCTC), a small Newton, MA-based software firm specializing in client/server applications linking point of sale custom fitting programs directly with single ply cutting programs in apparel factories. The new process operated as follows:
D O N O T C 1.
The “Personal Pair”™ kiosk was a separate booth in the retail store, staffed by specially-trained sales clerks and equipped with touch screen PCs.
2.
A sales clerk used a tape to take three measurements from the customer (waist, hips and rise) and recorded them on the touch screen. There were 4224 possible combinations of these three measurements.
3.
The computer flashed a code corresponding to one of the 400 prototype pairs stocked at the kiosk. The sales clerk retrieved the prototype pair for the customer to try on.
4.
Within one or two tries, the customer was wearing the best available prototype. Then the sales clerk used the tape again to determine the exact measurements for the customer (4224 possible combinations) and to note the length required (inseam).
5.
The sales clerk entered the 4 final measurements in the touch screen and recorded the order. Initially, the system was available only for the Levi’s 512 style, but 5 color choices were offered in both tapered and bo ot cut legs.
6.
The customer paid for the jeans and chose either Fed Ex delivery (a $5 extra charge, per pair) or store pick up. Delivery was promised in “not
Levis “Personal Pair™ “ Jeans (A).
BAB020
Assignment Questions
D O N O T C
1. Profitability, for any business can be thought of in terms of the basic Return on Invested Capital (ROIC) equation: Revenue - Cost
Profitability =
Working Capital + Property & Equip. Profit
=
Investment
Calculate the pretax ROIC for Levi Strauss for both channels shown in Exhibit 2. So what?
2. What impact will the Personal Pair™ system have on the value chain shown in Exhibit 3? Be careful to consider how each element of the chain will be affected, if at all. 3. How would you price the Personal Pair™ jeans (versus $50 for standard, offthe-shelf jeans)? Would you lower the price, since the customer must wait up to three weeks for delivery? Would you raise the price, since the fit will be much better? 4. In general, how will Personal Pair™ change the various elements of the financial footprint? Is the overall result a higher or lower ROIC? 5. What is your advice to management regarding the Personal Pair™ experiment?
Levis “Personal Pair™ “ Jeans (A).
BAB020
Exhibit 1
D O N O T C LEVI STRAUSS
AVERAGE FINANCIAL FOOTPRINT 1993-1995
Net Income 9.0%
Taxable Income 15.0% x Tax Rate 40.0%
Operating Profit 15.0% +/Other Items 0.0%
Gross Margin 40.0% S,G & A Exp 25.0%
ROIC
x
23.4%
Investment Turnover 2.60
Fixed Asset Turnover 5.33
ROE
x
38.6%
Working Cap Turnover 4.60
Days' Sales in Cash 30
A/R Collection Days 51 Inventory Days 77
Payables
Inventory Turnover 4.73
Levis “Personal Pair™ “ Jeans (A).
BAB020
D O N O T C Exhibit 2
Profitability Analysis of Women’s Jeans Wholesale Channel Estimate
OLS Channel Estimate
Gross Revenue Less Markdowns
$35 (3)
$50 (5)
Net Revenue Costs Cotton Mfg. Conversion Distribution Total COGS Gross Margin SG &A
32
45
Operations, per pair
Profit before Tax
5 5 9 19 13
41%
2
5 Given 5 High labor content since all jeans hand sewn 1 10 Large, wholly-owned distribution network 20 25 56% 3
9
$4
$50 retail price with a 30% channel margin Average channel markdowns of $5; 60% born by manufacturer
19
13%
$6 13%
Investment per pair
Inventory Less A/P Accounts Receivable
4
$4 (1) 4 6
5
$12 (1) 0 7
Reflects 27 days of Accounts Payable
D O N O T C O P Y
Levis “Personal Pair™ “ Jeans (B).
BAB021
Exhibit 3
LEVI STRAUSS
TRADITIONAL ORIGINAL LEVI’S STORE 512 SUPPLY CHAIN
Demand Forecasting Market Research Design Research
Production Planning
Macro Demand Uncertainty
INVENTORY
Raw Material Logistics
Lead-time Uncertainty
R. M. Inventory ~15 days
Factory Warehousing
Shipping by Truck Fleet & Common Carrier
Cycle-time Uncertainty and Variation
Demand Uncertainty and Variation
Schedule Uncertainty and Variation
WIP
F.G.
Production
Inventory ~15 days
Distrib. Warehouses Hub & Spoke
Demand Uncertainty and Variation
Ship to Retail Stores Truck Fleet
Schedule Variation
F.G. Inventory ~100 days
Inventory ~50 days
Retail Outlets
INVENTORY VARIETY
Heavy Eqp. Cutting (60 ply) Sewing Handling Packing & Shipping
Real Estate Investment
Vehicles Investment
Real Estate Investment
Vehicles Investment
Customer Satisfaction Level?
F.G. Inventory ~60 days
54% of customers generate 90% of sales
Working Capital Investment
500 to 1,000 SKU's per store, based on local patterns
20,000 SKU's
6
THE CUSTOMER
Micro Demand Uncertainty
Averge 8 Month Lead-Time
FIXED ASSETS
Sales & Promotions
Likelihood of Repeat Purchase?
76% of women customers not fully satisfied with the purchase
